Cape Town - Woolworths was selling a controlling stake in its consumer finance business to Absa for R875 million, the retailer confirmed yesterday.
Shareholders are in for a fillip as Woolworths intends to return as much as R2.25 billion to them. Investors have been critical of Woolworths' consumer finance business, even before consumers started running into arrears in the current high interest rate cycle, saying it lacked the banking expertise to price loans for risk.
Shares in the company ended up 3.13 percent to R12.20, while the general retailers sector gained 0.1 percent.
It is expected investors will receive a special dividend of R750 million, followed by the balance of R1.5 billion in a share buyback.
Absa will buy a 50 percent plus one share stake to give it control of what will be known as Woolworths Financial Services (WFS).
Deals such as these are frequently plagued by tensions, with banking partners moving to reduce bad debts and retailers doling out credit to push retail sales.
But Woolworths' director of financial services and operations Richard Inskip said the firm had never offered easy credit to boost retail sales.
The sale will also see Woolworths transferring its gearing, or debt, strategy from its consumer finance business to its retail business for the first time, as Absa takes on all debt funding in WFS.
At present the company is the only retailer to significantly fund its consumer finance business from debt.
The change will see Woolworths taking on R1.75 billion in debt in its retail business.
Finance director Norman Thomson said Woolworths currently had total debt of R4.99 billion, with assets in its consumer book of R5.6 billion.
Absa would fund 84 percent of the book, or R4.71 billion, to leave net borrowings of R275 million. This R275 million added to the sale price of R875 million, plus new retail business debt of R1.75 billion, would result in the R2.25 billion returned to shareholders.
Thomson said overall the business would increase its debt to shareholder equity from 60 percent to 66 percent.
With interest cover greater than 6 percent it would be able to service the additional debt.
Moody's said yesterday it affirmed Woolworths credit rating of A3.za, but said the outlook for the rating was stable. Moody's said with Woolworths' strong brand and market position, further declines in operating margins were expected to be limited.
Chief executive Simon Susman said it was the first time an in-store card had been sold to a bank, but the strong Woolworths' brand would be retained on these cards.
Credit cards would be sub-branded under Absa and Barclaycard. Woolworths said Absa would be able to run a more efficient book, but that WFS borrowing would not become significantly cheaper.
Evan Walker, a retail analyst at RMB Asset Management, said Woolworths had taken a strategic decision to deal with the long-term demise of store cards.
He said customers would move to the convenience of credit cards, which allowed them to shop where they liked.
Bank credit cards also allowed them to earn greater benefits, such as discounts on flights. The deal would allow Woolworths to benefit from this change in shopping patterns.
Walker believed that the R875 million purchase price was fair.
Credit retailers that have previously done deals with banks include:
- Standard Bank owns a 45 percent stake in Foschini consumer finance business RCS. RCS provides loans that can be used to purchase at Foschini as well as other retailers
- Edcon Holdings has a credit card joint venture with Standard Bank. Like any credit card, it can be used at a wide range of retailers
- Last year Ellerine was sold to African Bank Investments Limited for R9.83 billion. The sale included the consumer finance business as well as the furniture store chains
- The JD Group is splitting its consumer finance and retail businesses into two stand-alone business units, but has not stated any intention to sell the consumer finance business